Savings Account and Certificate of Deposit (CD) Rate Analysis

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Analysis of how savings account rates and certificate of deposit rates (cds) are trending base on current and historical data.

Updated: November 7, 2008

The chart below shows a very interesting trend that we\\'ve seen over the last six months with savings account rates and certificate of deposit rates.  Even though the Fed Funds Fund rate (the rates banks charge each other for overnight lending) has fallen since early April, savings and cd rates have actually risen.  Note that the divergence started with the near-failure of Bear Stearns, which marked the beginning of an intense period of financial turmoil.  Even as the Fed cut rates to 2%, savings account rates, 1 year CD rates, and 3 year cd rates rose.  The increase in rates seems to have reached its peak in mid-October with the Fed takeover of Fannie Mae and Freddie Mac, the failure of Lehman Bros, and the government takeover of AIG.  The passage of the bank bailout, officially known as the Treasury Asset Relief Program (TARP) as well as a swift cut in the Federal Funds rate from 2% to 1% has slightly thawed savings and cd rates and we are now starting to see a gradual decline in bank rates.

So, why did banks buck the interest rate trend and increase rates?  The answer is that the banks were desperate to keep your cash and get more of it.  Banks were deathly afraid of the kind of runs that brought down IndyMac, WaMu, Wachovia, and National City. 


(Graph shows the average of the top 10 savings account rates, 1 year cd rates, and 3 year cd rates according to the BestCashCow rate tables)

Will the decrease in deposit rates continue? Yes for two reasons:

  • If you look at the Fed Funds Futures (instruments that are based on future expectations of what the Fed will do with rates) they are giving high probabilities to a rate cut to either 0.75% or as low as 0.5% by January.  Lower Fed Funds Rates will put pressure on bank deposit rates.
  • Government efforts to support and recapitalize banks will take some of the pressure off banks to raise money from deposit holders.  The Fed has pumped in over $1 trillion dollars into the financial system.  Raising the FDIC limit to $250,000 also makes it less likely depositors will withdraw money if they sense trouble and will make it easier for banks to begin cutting rates.

So, what does all of this mean?  For a timeframe of between 1-2 years, opening a CD now may get you a higher return than waiting.  Based on economic conditions, it looks like banks will be reducing rates.  If you want to keep your money liquid in a savings account , you will see a drop in rates, but the drop will not be precipitous.  Banks are still hungry for your money and are willing to pay a premium for it.  They just aren't as hungry as before.

Check back for further updates and analysis of how economic conditions will impact savings accounts, cds, money markets, and more.

Bank of England Report Says Competition on For Consumer Deposits

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A mid-year report from the Bank of England analyzes the fall of the banking system and says that in the future banks must return to consumer deposits for funding. The report is an interesting overview of what has happened in the banking system.

The Bank of England today released the October 28 Financial Stability Report which paints a grim picture of the UK and global financial system.  While the report focuses on the UK, its analysis and insights are valauble for the US as well.

While the reports says that the banking system has somewhat stabilized, significant risks remain.  These include:

Hedge Funds

The report says:

"Recently, hedge funds have also experienced additional funding pressures due to redemption requests and a risk is that these could increase. Redemptions tend to increase following a period of weak returns. In 2008 Q3, hedge funds had one of their worst quarters on record, losing a little over 10% on average (Chart 5.6). Bank contacts report that redemption requests have been high in particular from funds of hedge funds (FoHFs) in the light of their own redemption requests. Hedge funds generally operate ‘gates’ that place an upper limit on aggregate redemptions in any given quarter. A risk for FoHFs is that hedge fund gates prevent them securing the liquidity that they need to meet redemption requests. FoHFs often have liquidity lines with banks on which they could draw in such circumstances. This would transfer the need for liquidity from FoHFs to banks. Hedge fund liquidity needs may help to explain sales of relatively liquid securities such as developed-country and emerging market equities, the prices of which have fallen sharply in September and October."

In plain English, investors are pulling their money out of hedge funds.  Many hedge funds are not liquid but have bank lines which they can use to meet investor requests to be cashed out.  This puts more of a strain on banks because they must pay out the funds.  In addition, the selling we've seen in emerging markets may be hedge funds selling stock to meet redemptions.

No one seems to think we're at the end of hedge fund pressure. 

Insurance Companies

Significant risks also remain with insurance companies:

"As long-term investors, insurance companies tend to hold a significant proportion of their assets in equities and corporate bonds. The marked decline in the value of these securities in 2008 has generated capital losses for some UK insurance companies, which is reflected in rising CDS spreads and falling equity prices for the sector (Chart 5.7). Unlike banks and hedge funds, however, insurance companies generally do not employ much leverage and have long-term liabilities. So insurance companies seem relatively well placed to avoid liquidity difficulties. Risks could arise, however, if the value of insurance companies’ investments were to fall below regulatory capital requirements. This was an issue in the bear market of 2003, but regulatory reforms introduced in 2004 have reduced the likelihood of this risk by using a more risk-based capital requirement with countercyclical resilience testing. A second risk is that credit ratings of insurance companies could be downgraded. Counterparts to any derivatives trades would then increase margin requirements, increasing the liquidity needs of the insurance sector."

The BofE seems less concerned about insurance companies. 


Banks are increasingly relying on short term funding to meet their liquidity needs.  This creates risk because if the funding dries up, they will not be able to roll their debt over, resulting in default.  One of the main solutions the BofE sees to this problem is a return to customer deposits.   The Bank writes:

"Over the medium term, banks can reduce vulnerability to rollover risk by financing a greater proportion of customer lending through customer deposits. Such adjustment would result in a narrowing of the customer funding gap. But banks’ willingness to raise customer deposits will be constrained by cost. In the United Kingdom, increased competition for customer deposits has pushed up the cost of such funding."

And there you have it.  The explanation for why deposit rates in the United States have not fallen as far or as fast as the drop in Treasuries and the Fed Funds rate.  Your cash is a valuable, steady source of funding for banks. 

And it will only become more valuable over time.  Don't part with it easy and make sure you are getting the best rate on your savings or money market accounts, or CDs.

Why It Takes Two to Four Days To Transfer Funds Online

The WSJ stepped into the high yield online savings world with an article on transfer times using online banks. There wasn't a lot of new information but it was a decent recap of why it takes 2-4 days to process a transfer.

The WSJ stepped into the high yield online savings world with an article on transfer times using online banks.  There wasn't a lot of new information but it was a decent recap of why it takes 2-4 days to process a transfer.

The Journal article describes this process of someone sending a transfer from an online svings account to their online checking account. at a different bank:

"What happens during that time? ING sends transactions in batches during the day to an automated clearinghouse, which sorts them and moves them to the receiving bank in a matter of two to four hours, according to Arkadi Kuhlmann, chief executive officer of ING Direct USA, a unit of ING Groep NV, and Elliott C. McEntee, chief executive of Nacha, the Electronic Payments Association, a not-for-profit group that oversees the automated clearinghouses.

In many cases, the receiving bank gets the transfer the same day. Under rules established by Nacha, money that moves on Monday should be available by the end of Tuesday. If the transfer slips to early Tuesday morning, the money should be available first thing Wednesday morning."

Banks then wait another day or two to ensure that the funds are good and have cleared.  According to the article, depositing money into an online account took even longer- 5 business days, as ING wanted to make sure the funds were good.

Here are some tips for speeding up the transfer process:

  • Plan ahead if you know you need the money.
  • See if your money market account ccount has check-writing privileges.  Paper checks can actually clear faster than electronic transfers.  
  • Compain if the transfer takes more than 2 business days to receive money you "pushed" from another bank.  NACHA, the organization thatruns the ACH system can levy fines on banks if they hold your money for too long.

The article states that Europe has a faster transfer system and that enhancements to speed up the transfer process are under development.  That's good news for consumers.  In the meantime, if you've done a transfer and it takes more than 2 business days, call your bank and complain.  

So, if you need your funds from an online account, plan ahead.